The Global Picture
One of the first consequences of the global financial crisis has been the apparent drying up of liquidity in international markets. This has restricted the ability of banks to offer, inter alia, trade finance in emerging markets due to reduced appetite for risk and tighter liquidity management.
According to an IMF survey of major global banks, the cost of trade finance has increased despite less restrictive monetary policies in many countries. The survey indicates also that the fall in trade is faster than expected, confirming widespread anecdotal evidence that the cost of trade finance has risen rapidly while its availability has fallen. Such a gap in trade finance could be as much as USD 300 billion, according to a World Bank estimate in March 2009.
One of the headline commitments in the G20 communiqué from its meeting in London on April 2, 2009 concerned the urgency of the development community to bolster trade finance. The communiqué identified the withdrawal of trade credit as a key reason for the dramatic drop in world trade and promised "at least USD 250 billion over the next two years to support trade finance.” This liquidity infusion is designed to lessen the impact of the financial and economic crisis on world trade and thus reduce the extent to which poor nations in particular are affected.
However, despite mounting political commitment to address the apparent trade finance shortages, its role in the collapse of world trade is still being debated by economists. While specific and firm data are difficult to locate, empirical evidence such as the drop in commodity exports from Africa due to liquidity constraints among international bank syndicates, indicate the severity of the problem.
The African Context
The trade finance situation in Africa is deteriorating rapidly; however, the necessary data that would shed light on the extent and causes of the crisis are generally fragmented and inaccessible. A key problem is that trade volumes are falling so fast. The AfDB has indicated in its forecasts that African exports will fall by USD 250 billion in 2009, or almost 45% from its pre-crisis levels.
Consequently, it has proven hard to demonstrate the proportions of the trade finance supply-side and/or demand-side impact for the falling trade volumes. Therefore analyses must rely largely on empirical perceptions. Further, African markets are facing a diverse range of constraints commensurate with their levels of financial sector development and integration in world markets, which renders generalized conclusions difficult.
It is clear that trade values in Africa are falling due to a variety of factors. For example, recession in advanced economies and slower growth in China have reduced demand for African resource exports. At the same time, the deflating of the commodity price bubble over the past several years has resulted in falling import values for foodstuffs. Volumes are falling as well; financial institutions around the continent report that their clients had imported heavily to protect themselves against further price
increases and are now liquidating these inventories. In several markets, political events have slowed government spending, further reducing imports.
The impact of the global crisis on African exporters is highly differentiated – by region, by sector, and by type of firm. A study carried out by J. Humphrey of the Institute of Development Studies in March 2009 shows that Sub-Saharan Africa appears to have been less affected, so far, by trade finance problems than other regions. The study indicates also that restrictions on credit in the domestic African market are hitting small traders and cooperatives that do not have the business linkages needed to
access inter-company credit; furthermore, to the extent that there is some credit rationing, the marginal firms are hit first. Finally the study shows that the African exporters interviewed were clearly affected by other issues arising from the global financial crisis, particularly declining demand for garments and exchange-rate volatility for horticulture exporters targeting the UK market.
The Bank’s recently commissioned study on key trade finance constraints in Africa indicates that the use of trade finance instruments is falling. One multinational bank reports that the number of trade instrument transactions processed declined by 50% in east Africa in Q4 2008 compared with a year earlier. This bank felt that “most of the difference” can be attributed to greater use of open account transactions, rather than a fall in demand.
In some markets, however, Central Banks, seeking to restrain capital flight, are requiring that all transfers be justified by trade instruments. The Central Banks of Nigeria and Egypt, among others, are currently only transferring funds that are backed by a bona fide trade instrument.
At the same time, market conditions for trade instruments are changing. Financial institutions in Kenya and Ghana report a 50% increase in the cost of LC confirmation, those in Senegal and South Africa report increases of “at least” 25%, while banks in Nigeria say prices have increased “significantly.” Further, financial institutions report that available tenors are significantly shorter. They point out that most top-tier financial institutions across the continent had access to up to 360-day confirmation lines throughout 2008, whereas presently tenors are no longer available for more than 180 days. Most banks report that this does not inhibit their operations, as the bulk of their client transactions are less than 180 days. From the foregoing it becomes clear that the reasons for the decline in trade in Africa are many and diverse.
The market for funded transactions is significantly more difficult. Financial institutions in Nigeria, South Africa, and Egypt all report that funded import lines are quasi-unavailable due to USD liquidity constraints. One large Nigerian bank reported that line availability has shrunk by 70% in the past 6 months, seriously impacting their ability to serve their clients. One medium-sized South African bank reported that their only funded import line from a large regional bank had just been canceled. Global and regional banks that have been major players in this market indicate that they have no interest in funded transactions at this time. One global bank said it would consider 90-day funded transactions on a case by case basis but only for its best clients. OneKenyan bank indicated that the number of funded transactions was 10% of what it hadbeen in the past and that prices for USD facilities had doubled, despite the fact thatKenya was “a better risk now.” The African Trade Insurance Organization (ATI), so far mainly operating in Eastern Africa from its base in Kenya, indicated that a general reassessment of risks – caused as much by the financial crisis as by the slowing down of the world economy – is harming Africa’s trade.
Globally the export finance syndications market has declined rapidly, and the situation in Africa is no different. From 2006 to 2008, 164 non-African financial institutions participated in USD/EUR African deals. Coffee, cocoa, tobacco, palm oil and cotton are the primary commodities that are financed via international export syndications. The case of COCOBOD, Ghana’s cocoa export organization, serves as a useful "borrower of reference" as it has a long track record and borrows large amounts.
The export of the 2009 harvest is now endangered by the difficulties the long-time syndicate leader is facing to raise the required funding, primarily due to liquidity constraints by traditional syndicate members.
Manufacturing exporters generally operate on open-account or long-term contractual arrangements. Volumes are likely to fall due to weak demand in Europe. Furthermore, the crisis may also have implications for the viability of manufacturing supply chains and outsourcing that have driven globalization in recent decades (via AGOA and EU-ACP Agreements). Insofar as global production fragmentation was conditional on cheap finance and ample liquidity, a reversion to a period in which trade finance is more expensive may result in a geographic restructuring of production chains and greater vertical integration within large firms.
In conclusion, Africa is not immune to global trends and as the crisis spreads, the ability to meet the demand for trade finance may become increasingly challenging. At the same time, the cost of failing to anticipate severe shortage of trade finance in general – particularly short-term trade finance – could have drastic implications for exporters and importers in Africa. Consequently, while the impact of the global crisis on African exporters and importers varies among regions and countries as well as in type and form, what emerges as a common denominator, in parallel with the multitude of other contributing factors, is the lack of liquidity. Therefore, bolstering liquidity through a wholesale mechanism like GTLP would seem to constitute an effective means of alleviating the impact of the crisis in Africa.